Informal Staff Advisory Opinion 05-3

This staff advisory opinion is issued in response to your recent request for our views on whether your company’s proposed business opportunity constitutes a “franchise” under the Franchise Rule, 16 C.F.R. Part 436.

I. INTRODUCTION

Your company, Universal Cash Express (“UCE”), seeks to market its point-of-sale touch screen terminals in retail locations. Through the use of these terminals, consumers can purchase various pre-paid goods or services, such as phone cards, cellular recharge minutes, debit cards, and gift cards. To develop retail locations for the terminals, UCE seeks “to train” Independent Service Organizations (“ISOs”). The cost of the training program, $3,995, includes a demonstration touch screen. ISOs lease additional terminals from UCE at a cost of $890 per month for 10 terminals. UCE’s opportunity includes support services, such as setting up appointments with potential retail locations (or cold calls to potential retailers); providing email, telephone, and internet online help desk support; and providing information on current and new products. You now ask whether the offer of UCE’s package to ISOs constitutes a franchise under the Franchise Rule.

II. DEFINITION OF THE TERM "FRANCHISE"

We begin our analysis by noting that the term "franchise" refers to a continuing commercial relationship. According to your submission, the relationship between UCE and the ISOs appears to be continuing. ISOs lease terminals from UCE on an ongoing basis, and receive continuing support services, including the ability to offer new products arranged by UCE. Under these facts, a prospective ISO could reasonably conclude that his or her relationship with UCE is continuing. This is sufficient to satisfy the Rule’s continuing commercial relationship prerequisite.

To be covered by the Franchise Rule, a business opportunity must also satisfy the following three definitional elements: (1) the investor sells goods or services supplied by the seller or its affiliates, or by suppliers with whom the investor is advised to do business; (2) the seller secures retail outlets or accounts for the goods or services, or secures locations for vending machines or racks, or provides the services of someone who can perform either of these functions; and (3) the investor makes a required payment, or a commitment to pay, to the seller or its affiliate of $500 or more from any time before to within six months after the business becomes fully operational. 16 C.F.R. §§ 436.2(a)(1)(ii) and (a)(2). For the following reasons, we conclude that UCE’s opportunity satisfies these three definitional elements.

1. Distribution of Goods or Services Supplied by UCE

Based upon your submission, it is clear that UCE intends to offer ISOs point-of-sale touch screen terminal opportunities. These terminals, which enable consumers to purchase various goods or services from third-party suppliers, are conceptually indistinguishable from vending machine opportunities that are clearly covered by the Rule.

The fact that UCE apparently does not offer its own products for sale to consumers is immaterial. Commission staff have long held that the offer and sale of vending machines alone, without the sale of underlying products to stock the machine, is all that is required to satisfy the Rule’s first business opportunity definitional element:

The first [definitional] element is satisfied whenever "franchisees" sell vending services in circumstances where the vending equipment is supplied by either the franchisor, an affiliate of the franchisor or a third person from whom the franchisor directly or indirectly requires the "franchisee" to purchase such equipment.

Hermann Industries, Ltd., Bus. Franchise Guide (CCH) ¶ 6430 (August 6, 1982).

Indeed, the Franchise Rule expressly states that "services" can be offered, sold, or distributed through a business opportunity. In Craft World International, Bus. Franchise Guide (CCH) ¶ 6439 (May 16, 1984), we noted that the first definitional requirement is met when "a promoter supplies a service indirectly by providing essential equipment, such as vending or video game machines, as part of a business package." Id. at 9612 (emphasis added). As staff noted, "to require that a promoter play a greater role would read service ventures out of the rule." Id. at 9613. Thus, by incorporating the term "services" in the Rule's definitional section, the Commission contemplated that vending machine sellers could make products or services available to the public through vending machine operators. Accordingly, UCE’s provision of terminals through which consumers will purchase various goods or services is covered by the Rule.

2. Location Assistance

We have previously addressed the issue of location assistance in numerous advisory opinions. For example, Advisory 93-8, Bus. Franchise Guide (CCH) ¶ 6452, stated that a business opportunity seller need not literally secure locations for an investor and that both direct and indirect location assistance is sufficient for Rule coverage. We noted that the Commission will consider two factors when analyzing whether a business opportunity seller provides the requisite location assistance: (1) the kinds of location assistance the seller offers; and (2) the significance of that assistance to the investor. Id. at 9630.

With respect to the kinds of assistance offered, we stated that the Commission will apply a flexible standard: The second required definitional element contemplates only that the franchisor "more than nominally assist the franchisee" in finding sites or locations. Id. See also Statement of Basis and Purpose, 43 Fed. Reg. 59,614, 59706 and n.75 (Dec. 21, 1978). Finally, the Commission will analyze the "significance" of assistance in the context of the specific business opportunity, focusing particularly on whether the seller's offer is "reasonably likely to have the effect of inducing reliance on [the seller] to provide a successful pre-packaged business." Id. Applying this standard, we previously stated that Rule coverage might be found, for example, where the seller introduces investors to an unaffiliated person who will secure locations or accounts for them; provides investors with lists of persons able to furnish location services; or instructs investors on how to find their own profitable locations. See Hermann Industries, Ltd, Bus. Franchise Guide (CCH) at 9603.

In your submission, you acknowledge that UCE offers to arrange for retail locations for the ISO’s terminals. Indeed UCE’s literature states: “We will assign you a personal location consultant to assist you in identifying suitable areas in your area for placement of our system.” This location assistance offer includes “cold-calling” retailers on behalf of the ISOs. Indeed, UCE acknowledges that cold-calling “is the hardest part of selling for most people – we do it for you!” Accordingly, prospective ISOs are likely to rely on such offers in deciding whether to invest in the UCE opportunity. UCE’s offer of location assistance, therefore, satisfies the Rule’s second definitional element.

3. Minimum Payment

In your letter, you state that ISOs will pay at least $3,995 for the ISO package. As noted above, a franchise relationship will be covered by the Rule if the franchisee pays, or commits to make a payment, of at least $500 in the first six months of operations. The fact that UCE describes the payment as a “training” fee is immaterial. The Commission has long held that the definition of “payment” is very broad, covering all sources of revenue to the seller, including fees for rent, advertising assistance, and required equipment and supplies. Final Interpretive Guides, 44 Fed. Reg. 49,966 at 49,967 (Aug. 24, 1979). Accordingly, the minimum payment requirement is satisfied in this instance.

III. CONCLUSION

For the reasons stated above, we conclude that UCE’s offer of point-of-sale terminal opportunities constitutes a business opportunity covered by the Franchise Rule. Please be advised that our opinion is based on all the information furnished in your request. This opinion applies only to your company and to the extent that actual company practices conform to the material submitted for review. Please be advised further that the views expressed in this letter are those of the FTC staff. They have not been reviewed, approved, or adopted by the Commission, and they are not binding upon the Commission. However, they do reflect the opinions of the staff members charged with enforcement of the Franchise Rule.

Date: April 29, 2005
Franchise Rule Staff